Gold Always Wins
InvestorIntel Publisher Tracy Weslosky has generously invited me to write about a new e-book I have launched through Amazon. It is called Gold Always Wins: How the Yellow Metal Defies its Critics. The theme of this small book is that gold has had many enemies, especially over the past 80 or 90 years (and particularly since 2002). I try and show how each of these attacks has been beaten back and that gold is still at the beating heart of the world economic system.
Type the word “deflation” into Google News and you get 697,000 hits. This economic cloud is now becoming a matter of growing concern: after years of quantitative easing, the world economy is little better off financially. And the debt has increased by the trillions. This failure to light a fire under the global economy has many commentators fearing deflation is looming.
Mario Draghi, head of the European Central Bank, said this week he was prepared to launch a €1 trillion bond buying blitz to stimulate the European economy (and, no doubt, try and stave off deflation).
The world is not out of the economic woods, as the Draghi intervention shows. So how does gold behave in deflation? Here is an excerpt from the book on that very issue:
Deflation as well as inflation can cause conditions in which gold is an attractive acquisition. The inflation case is clear: gold, rather than paper money, maintains its value. But, anyway, let’s daydream for just a few moments about a world where gold is the one trusted store of wealth (as it was during the Great Depression). Gold’s role in deflation was amply demonstrated by Homestake Mining which saw its shares rise each year between 1929 and 1935 and so, too, its dividends to shareholders. During the six years of the Great Depression, Homestake Mining paid out $US128 per share in dividends. If you bought Homestake Mining shares from your Wall Street broker in October 1929 they cost $80, but by 1935 Homestake stock was worth $495 per share.
In 1932, when severe deflation was kicking in, people not only hoarded gold – they wanted to dig more out of the ground. ‘Never before has the world been so thoroughly grubbed for gold,’ reported Time magazine on 12 December 1932. Old time prospectors swarmed to abandoned goldfields and minor gold rushes were reported to be happening in Australia, South Africa, Chile, the Philippines and Venezuela.
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In February 1933 The Wall Street Journal reported that world mine production in 1932 had reached a new record of 23.9 million ounces – up 7.8 per cent on 1931 output, and valued at $494.2 millions. Not only that, India had unlocked much of its gold reserves to meet global demand for the metal; it was estimated that British India between 1873 and 1931 had accumulated gold worth as much as £600 million (which is about £32.5 billion in 2015 pounds). South Africa dominated production with its mines turning out 11.56 million ounces in 1932. Next came Canada with just over three million ounces. The United States and the Soviet Union were third and fourth. (Russian output was growing apace under Stalin’s urging: upwards of twenty dredges had been installed at alluvial deposits over the previous five years.
By the end of 1933 the Los Angeles Times was reporting that California had embarked upon a new era of gold mining, and there were more than 800 mines operating in the state with around 12,000 men prospecting in the mountainous areas. This was in spite of the federal government banning private ownership of the metal. (President Roosevelt’s Executive Order 6102 forced Americans to hand over their gold to the government and made the possession of monetary gold by any individual, partnership, association or corporation a criminal offence.)
At the start of 1933 Barron’s noted that, in 1932, not only had the world produced more gold than ever before, the central bank holdings rose to their highest level ever. As of January 1, 1933, the U.S and France between them held 61.5% of the world’s gold stocks and European central banks were keen to retrieve their bullion stored with those two countries. In the first quarter of 1932, Washington repatriated 23.3 per cent of gold under its care.
Austria passed an emergency law forbidding gold being taken out of the country. The government even banned dental supply houses buying the metal (dentists were being used by investors and speculators as a front to buy the metal legally). Italy launched a ‘battle of gold’ to encourage people to turn over their metal in return for paper money.
The surge in gold demand also led to increasing speculation in gold shares. In New York, Alaska Juneau shares went from $11 to $15 in late 1932 — not as spectacular a gain as that of Homestake Mining shares but not bad considering the state of the U.S. stock market.
In May 1932 The Mail (then an Adelaide newspaper) reported that ‘in times of trade depression, increased attention was being paid to gold mining in Australia’ and shares in those miners had been doing well, too.
Gold production was also helped by improved ore treatment, the reduction in costs of machinery and labour due to the depression, as well as by the League of Nations predicting that by 1940 the world’s gold production would be in serious decline.
True, none of this is going to happen again. But what 1932 did show was that gold marches to its own drumbeat and that it can always do something quite different from what you might expect.
GOLD ALWAYS WINS: How the Yellow Metal Defies its Critics is available as an e-book from Amazon — click here to buy
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